Understanding cash flow statement


Cash flow statement refers to a statement which shows outflows (payments) and inflows (receipts) of cash during a specific time period. It helps to analyze the reasons 


which are required for changes in cash balance between the two balance sheets and thus can help students needing assignment help with balance sheets. The term ‘cash’ here shows the cash and cash equivalents. 


Only the items which affect cash are included in cash flow statement. The students requiring accounting assignment help, must remember the following points about cash flow statement.

Importance of cash flow statement:-

  1. Useful for Short-term Financial Planning:


 A cash flow statement provides us with the information of planning the short-term financial needs of the firm. As it provides the information about the utilization and the sources of cash during a specific period, 


it makes it easy for the management to assess whether it will have sufficient cash to pay the creditors in time and to meet the day-to-day expenses, 


or whether it will have adequate cash to pay the interest and long-term loans and whether it has sufficient cash for the payment of purchase of fixed assets or not.

  1. Useful in preparing the Cash Budget: 


A cash budget can be prepared with the help of a cash flow statement which was prepared for future period. It provides the information to the management about the deficit periods of cash or surplus, that is, 


which months will have excess of payment over receipts and in which month the receipts of cash will be in excess of the payments. In advance, it helps to plan the short-term credit for deficit periods. 


Also, it helps to plan the investment of surplus cash in short term investments. 

  1. Comparison with the Cash Budget: 


A cash flow statement is prepared at the end of the year while a cash budget is prepared at the beginning of the year. 


Comparison between the two helps us to ascertain the limit to which the firm’s financial resources are generated and are used in accordance with the plan. 

  1. Study of the trend of cash receipts and payments: 


A cash flow statement shows the speed limit at which the cash can be generated from inventory, trade receivables and other current assets and also measures the speed at which the current liabilities can be paid. 

  1. It Explains the Deviation of Cash from Earnings: 


A firm suffering a loss may have plenty of cash and also a firm which earns a huge profits may have a paucity of cash. Cash flow statement has the reasons for it.

  1. Helpful in Ascertaining of Cash flow from various activities separately: 


a cash flow statement sets its aim to highlight the Cash flow from Operating Activities, Investing and Financing Activities in a separate manner. It tells us that how much cash has use or generate in these activity.

  1. Helpful in making Dividend Decisions: 


A separate ‘Dividend Bank a/c should be make in which the amount of dividend can be deposite within five day of declaration of such dividend. 


Thus, in this case, a cash flow statement help the management in ascertain the position of the cash that is generate from operating activity that can  use to pay the dividend.

  1. Test for the managerial decisions: 


According to the general rule, fixed asset shall purchase from the funds that are raise from long-term sources as in long-term loans, 


issue of shares, debentures, etc. and which are to be rapid out if the cash generated from operating activities. 

  1. Useful to outsiders: 


Cash flow statement provide help to the debenture holder, lender, investor, banker, supplier of credit, etc. for the analysis of the financial position of the enterprise and the proper decisions can take on such analysis.

One must not forget to study limitations while referring for accounting assignment help.

Limitations of Cash Flow Statement:-

  • Not suitable for judging the liquidity: 


The true picture of the liquid of the firm is not present it as the liquid is not only dependent upon the cash. It also has its dependance on those asset which can be easily convert into cash. 


Exclusion of these asset can obstruct the actual report of the firm’s ability to meet its liability when they become due to paid.

  • Possibility of Window-Dressing: 


The working capital position of a firm has lower possibility of window-dressing than in the case of cash position. 


Before the Balance Sheet date, the maneuvering of the cash balance becomes easy by postponing the other payments and the purchases and also by rapidly collecting the cash from debtors.

  • It ignores non-cash transactions: 


statement ignores non-cash transactions like conversion of debentures into shares, purchase of fixed assets by issuing shares or debentures, issue of bonus shares. 


Thus, the statement cannot judge the exact position of the enterprise.

  • It ignores the accrual concept of accounting: 


Accrual concept, which is one of the basic concept of accounting, is ignore it as it is prepare on cash basis. 

  • No substitute for an Income Statement: 


Cash flow Statement does not substitute the Income Statement which take into consideration both non-cash item and cash item. Hence, net cash flow cannot said as net income of the business.

  • Historical in nature: 


The past years statements, help to prepare a cash flow statement. Thus, all the information which are show it are of historical nature. If the projected cash flow statement accompanies a cash flow statement, then the information revealed by it will be more useful.

Hence, a cash flow statement reflects the details of change (increase/decrease) of the cash and cash equivalents in operating, investing and financing activities. In the special treatments, 


it also shows the net change in the cash and cash equivalents. Thus, these were a few points that would assist students who require assignment help.

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